GFC or KFC?

: How Standard Setters Were Battered and Fried

Bryan Howieson

T
he Global Financial Crisis (GFC) has proven to The Global Financial Crisis (GFC) has exposed the
be a theatrical giant to rival Shakespeare’s Julius fragility of both the alleged independence of the
Caesar (1601) for it allowed those opposed to fair International Accounting Standards Board (IASB) and
values and mark-to-market accounting to ‘Cry “Havoc” the Financial Accounting Standards Board (FASB)
and let slip the dogs of war’ upon the International and their agreement to work together on major projects
Accounting Standards Board (IASB) and the United such as accounting for financial instruments. This paper
States’ (US) Financial Accounting Standards Board outlines the events that have dogged the IASB and FASB
(FASB). The assault has been ferocious and wide spread in their attempts to respond to the GFC and explores the
and has, according to the Financial Crisis Advisory implications of the recent political pressures on accounting
Group (FCAG), potentially undermined confidence standard setting for the likelihood of ultimately achieving
in the standard setting process and risked the very one global set of accounting standards.
movement for the global convergence of accounting
standards (FCAG 2009: 12). Central to the debate have,
inter alia, been the issues of the application of fair value
measurements in illiquid markets, the use of off-balance
sheet entities for securitisations, the recognition of loan
losses, and the lack of clarity in relevant accounting
standards. These matters have been discussed elsewhere
(see, for example, Laux and Leuz 2009). Rather this paper
analyses the political pressure applied to the IASB and
FASB and evaluates the responses of those entities to that
pressure.
The ability of standard setters to appropriately and
independently manage and react to such pressures
is central to promoting convergence efforts and to
maintaining the quality of financial reporting (Dean
and Clarke 2010). This paper will show how the
existing mechanisms for promoting standard setters’
independence (namely due process and oversight
bodies) were overwhelmed in 2008 and 2009 as the
standard setting boards were battered by a clash of
economic and cultural interests (for example, the
European Union (EU) and the US) and then fried in a
political oil heated by the self-interests of some elements
of the financial sector. The GFC’s impact on regulation
is not limited to accounting standard setters as capital
market and prudential regulators were also boiled in
the political pot. Although in 2010 it would seem that
the IASB and FASB have been able to get out of the Correspondence
frying pan, it is still too early to determine whether they Bryan Howieson, Business School, University of Adelaide,
South Australia. Tel: (08) 83034760; fax: (08) 82234782; email:
have also escaped the fire. This review of the history of bryan.howieson@adelaide.edu.au
standard setting during the GFC may provide insights
for the protection of standard setters in future crises. doi: 10.1111/j.1835-2561.2010.00115.x

Australian Accounting Review No. 56 Vol. 21 Issue 1 2011 3

GFC or KFC?: How Standard Setters Were Battered and Fried
2008 – The Heat is On
As the contagion of the GFC spread during the first
half of 2008, claims emerged that fair value mark-to-
market1 accounting was to blame – some suggested it
was the ‘cause’ of the GFC while more moderate critics
suggested that it was the ‘pro-cyclical’2 consequences of
mark-to-market accounting that were at fault. Initially,
the media reported that the IASB would ‘not dilute’ its
fair value standards (Anon. 2008a). However, by August
2008 the press reports were beginning to show that the
independence of the IASB to determine the contents of its
standards was at risk (Norris 2008a: 13): ‘The European
Union has asserted the right to approve or modify
each standard issued by the International Accounting
Standards Board and did allow banks to ignore part of
one standard. In an effort to deal with that issue, the
SEC [Securities and Exchange Commission] has said it
would accept filings using international standards only
if they complied fully with the standards as issued by the
board’.
The EU’s assertion of its sovereignty over accounting
standards within its member countries was imposed
by an elaborate and cumbersome multi-entity advisory
and approval structure including the European Financial
Reporting Advisory Group (EFRAG) whose role is
to advise the European Commission as to the
appropriateness of any IASB standard. EFRAG in turn
consists of two entities, a Technical Expert Group and a
Supervisory Board as well as other working committees
(see Perry and Nöelke (2005) for a more detailed
description of the European endorsement process for
international accounting standards). This endorsement
process slows down approval of IASB standards for use
in the EU and also provides many opportunities for
lobbying interventions.
Pressure on standard setters (and other capital market
regulators) was also growing across the Atlantic. The
Bush administration’s Troubled Asset Relief Program
(TARP) tackled the economic impacts of the GFC
including, on 3 October 2008, the Emergency Economic
Stabilization Act. As a result of lobbying by banks and
some Republican politicians (Norris 2008b), section 133
of that Act required the SEC to conduct a study into
the effects and impacts of mark-to-market accounting
as promulgated in FASB standard FAS 157, Fair Value
Measurements. The report was to be completed within
90 days of the enactment of the Act. What may be less
known is that section 132 of that Act also gave the SEC
the explicit power to: ‘suspend, by rule, regulation, or
order, the application of Statement Number 157 of the
Financial Accounting Standards Board for any issuer
(as such term is defined in section 3(a)(8) of such Act) or
with respect to any class or category of transaction if the
Commission determines that is necessary or appropriate
4 Australian Accounting Review
B. Howieson
in the public interest and is consistent with the protection
of investors’.3
At the same time, the SEC (and FASB staff),
allegedly in a move to placate criticism from Republican
politicians (Norris 2008b), issued a statement entitled
Clarifications of Fair Value Accounting (SEC 2008a). The
purpose of the statement was to provide ‘immediate
additional guidance’ on a number of practice-related
issues on FAS 157. These issues included the use of
managements’ internal assumptions, the use of market
quotes, and the impact of inactive and illiquid markets
on the estimation of fair value measurements. This
statement was positively received by the critics of FAS
157 who had argued that ‘There is a serious concern
that these accounting rules are worsening the credit
crunch, making it difficult for small businesses to stay
afloat and squeezing family budgets’ (Republican John
McCain’s advisor Douglas Holtz-Eakin quoted in Norris
2008b).
These developments in the US provided the banks and
politicians in the EU with additional leverage to pressure
the IASB. In early October 2008 it was reported that
the chief executive of the British Banking Association
had said ‘There’s a view that [the IASB] are moving
much slower than their counterparts in the US. They
need to get on with making practical changes’ (Seib
and Jagger 2008: 43). Similarly, the French President,
Nicolas Sarkozy, was reported to have promised that ‘We
will ensure that European financial institutions are not
disadvantaged vis-a-vis their international competitors
in terms of accounting rules and of their interpretation
. . . This issue must be resolved by the end of the month’
(Seib and Jagger 2008: 43).
Despite the assertion in early October by the IASB that
the statement issued by the SEC was just a clarification
and was ‘consistent with IFRSs’ (IASB 2008a), the IASB
bowed to the pressure it received from the banking
industry and politicians, and on 13 October 2008 it
issued amendments to IAS 39, Financial Instruments:
Recognition and Measurement, and IFRS 7, Financial
Instruments: Disclosures. These amendments permitted
reclassifications of some financial instruments under
certain ‘rare circumstances’ (IASB 2008b). The state of
the financial markets at that time was considered to be
an example of such rare circumstances and, it was noted,
the amendment would align IASB and US accounting
standards on the matter (IASB 2008b).
Notwithstanding its usual cumbersome endorsement
procedures, the European Commission moved swiftly to
adopt the IASB’s amendment to give ‘European banks the
opportunity to present third-quarter results on the basis
of the new regulations’ (Anon. 2008b: 36). The positive
impact on the financial statements of Europe’s banks was
noted in the press. For example, ‘KBC, the Belgian bank
which yesterday announced a writedown of 1.6bn . . . on

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B. Howieson
collateralised debt obligations (CDOs), indicated that its
third-quarter profits could be as much as 500bn higher’
(Anon. 2008b: 36). However, not all commentators
perceived the IASB’s change as a positive development.
In Canada, two analysts at J P Morgan Chase & Company
were quoted as saying (Perkins 2008: B3) ‘that weak
accounting enforcement in EU countries could leave
the definition of “rare” circumstances open to abuse.
They also argue the new rules reduce transparency, and
the hasty change “establishes an unfortunate precedent
of political considerations overriding the need for high
quality accounting standards, and of suspension of due
process”’.
At the end of 2008 the SEC released its 259-page report
on its study of mark-to-market accounting (SEC 2008b).
Perhaps to the disappointment of the critics of fair values,
the report concluded that ‘fair value accounting did
not appear to play a meaningful role in bank failures
occurring during 2008’ (SEC 2008b: 4). Additionally,
it also supported the need for the independence of the
FASB’s deliberations to be maintained and extended.
The study noted that the available evidence suggested
that investors found fair values to be relevant to their
decision-making. Nevertheless, the SEC’s study did
recommend, inter alia, that further guidance was needed
for determining fair values in distressed markets and,
in particular, standards relating to the impairment of
financial assets needed to be readdressed to provide more
detailed guidance.
2009 – The Flames Are Fanned
Notwithstanding the findings of the SEC’s study, the
movement against fair values (and as a consequence,
accounting standard setters) intensified. In the US,
Forbes (2009) in an oft quoted opinion piece in
The Wall Street Journal, stated that ‘Mark-to-market
accounting is the principal reason why our financial
system is in meltdown’ and that it was ‘unnecessarily
destroying banks’. Allegedly egged on by the banking
industry (Norris 2009a), two members of the US
Congress, Perlmutter (Democrat – Colorado) and Lucas
(Republican – Oklahoma), introduced in early March a
bill (HR 1349) to create a ‘Federal Accounting Oversight
Board’ to ‘oversee [and approve] the application of
Generally Accepted Accounting Principles (GAAP) to
the financial markets’ (Perlmutter 2009a). The Board
was to have consisted of the chairmen of a range
of federal agencies because there is a ‘need [for] a
broader view than the SEC provides in determining
how accounting standards apply to the banking sector’
(Perlmutter 2009a). The proposed Board was welcomed
by the American Bankers Association whose president
was quoted as saying that the Board would address
‘systemic risks that accounting standards can have on

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GFC or KFC?: How Standard Setters Were Battered and Fried
the economy’ (Norris 2009a). The board proposed by
the congressmen was a direct threat to the independence
and authority of both the FASB and SEC and opened
the possibility that prudential regulators might be able
to overrule accounting regulators.4
March and April 2009 were not good months for the
FASB. In addition to the Perlmutter and Lucas Bill, the
FASB’s chairman, Robert Herz, as well as representatives
of the SEC and the Office of the Comptroller of
the Currency (OCC), were subject to intense pressure
on 12 March from a US House of Representatives
Congressional Hearing on Mark-to-Market Accounting:
Practices and Implications held by the Sub-Committee on
Capital Markets, Insurance, and Government Sponsored
Entities. All members of the sub-committee on both
sides of politics pressured the FASB and other regulators
for urgent action. For example, the Chairman of the
Sub-Committee, Paul Kanjorski, commented in his
opening remarks (Mark-to-Market Accounting 2009: 2–
3): ‘Accounting regulators and standard setters need to
offer us an achievable, concrete idea of what they are
doing. As I said earlier, they must also tell us precisely
when they will act. In my view, we can no longer wait 15
years, 15 months, or even 15 weeks for change. We need
action much, much sooner. . . . Emergency situations
require expeditious action, not academic treatises. They
must act quickly’.
Media reports commented on the ‘grilling’ received by
Herz and other regulators, which at times seemed close
to bullying. Consider the following exchange between a
member of the committee (Mr Ackerman), Mr Herz,
and Mr Kroeker (SEC) (Mark-to-Market Accounting
2009: 30):
Mr. ACKERMAN. I think what the chairman said is if
you do not act, we will. The timeframe that you are
starting out with, thinking you have the luxury of that
much space is not acceptable, I do not believe, to the
members of this committee on either side of the aisle.
If you are going to act, and we have to respond to what
you are going to do, you have to get back real quick
and let us know. So maybe you want to start the answer
again?
Mr. HERZ. Okay, I have heard you, I have heard you very
clearly. We will go back, and we will consider exactly how.
Mr. ACKERMAN. Can you do this whole thing in the 3
weeks that was referenced before?
Mr. HERZ. We probably could.
Mr. ACKERMAN. Will you do this within 3 weeks?
Mr. HERZ. I have to talk to the other members of my
board.
Australian Accounting Review 5
GFC or KFC?: How Standard Setters Were Battered and Fried
Mr. ACKERMAN. When will you talk to them?
Mr. HERZ. I will talk to them when I get back tonight.
Mr. ACKERMAN. Tonight?
Mr. HERZ. Yes.
Mr. ACKERMAN. Mr. Kroeker, with the right
cooperation between the two of you, can you do this
in 3 weeks?
Mr. KROEKER. We can absolutely work with the FASB
in that timeframe.
Mr. ACKERMAN. Within that timeframe?
Mr. KROEKER. We expect within in that timeframe
and we, as I said in my testimony, we expect action
within weeks, not months. The Commission, the staff,
my staff stands ready to assist the Commission in any
way possible if we do not see that action.
Mr. ACKERMAN. So if the press wanted to report
accurately, we could have this fixed in 3 weeks?
Mr. HERZ. We could have the guidance in 3 weeks,
whether it would fix things is another question. I hope
it will.
Mr. ACKERMAN. I am not talking about the result out
in the street, but I am talking about fixing the problem.
Mr. HERZ. Yes.
Mr. ACKERMAN. In terms of what we all have been
talking about.
Mr. HERZ. Yes.
Mr. ACKERMAN. That can be done in three—it will be
done in 3 weeks, can and will?
Mr. HERZ. Yes.
Mr. ACKERMAN. Can and will?
Mr. KROEKER. Yes.
On 9 April, the FASB issued three Final Staff Positions
(FSPs) relating to the determination and disclosures of
fair values and the treatment of other than temporary
impairments which received some criticism in the press
(for example, Cox and Beales (2009) and Norris (2009b))
but were welcomed by some politicians (for example,
Perlmutter 2009b). Criticisms included that the FASB
had given in to political pressure as a result of the
congressional hearing and would allow financial institu-
tions more discretion and this would ultimately confuse
6 Australian Accounting Review
B. Howieson
investors (Cox and Beales 2009). Most significant was
the apparent lack of due process on the part of the
FASB; ‘The board allowed only 15 days for comments
and said it would act after taking just a day to review the
comments. Those comments arrived by the hundreds5 ,
including bitter reactions from investors’ (Norris 2009b:
20). The Investors’ Working Group (IWG) established by
the Chartered Financial Analyst Institute and the Council
of Institutional Investors issued a press release in which
it was stated that (CFA Institute 2009):
the current political and special interest pressures placed
on the Financial Accounting Standards Board (FASB) to
change fair value accounting standards are unacceptable
and very troubling. The IWG added that they are
concerned and dismayed by the lack of normal due
process and the accelerated timeline for commenting on
FASB’s proposals on ‘other than temporary impairment’
issues and determining whether a market is distressed.
In order to create high quality accounting standards,
it is critical that the process be independent and
free from political pressure. This will ensure that
such standards are neutral and faithfully represent
economic reality. To the extent that these new FASB
proposals reduce the free flow of transparent and
reliable financial information, they undermine investor
interests and weaken their ability to make sound
investment decisions. Moreover, when this process is
rushed and potentially compromised, it leads to an
increase in capital costs, erosion of investor confidence,
and ultimately a disruption of markets.
In response to the criticisms, the chairman of the FASB
was reported to have said (Stewart 2009: B1) ‘We went
through a full due process . . . It was accelerated and
expedited. Not everyone is going to agree’.
In Europe, the Group of 20 (G20) issued on 2 April
its Declaration on Strengthening the Financial System
(G20 2009) which required that ‘accounting standard
setters should improve standards for the valuation
of financial instruments based on their liquidity and
investors’ holding horizons, while reaffirming the
framework of fair value accounting’ (G20 2009: 5). The
declaration’s focus on liquidity and investors’ holding
horizons can be viewed as code for the G20’s desire to
move away from the estimation of fair values based on
actual market evidence (Gettler 2009). In its response
to the G20 declaration, the IASB (IASB 2009) preferred
to refer instead to a G20 recommendation that there
be significant progress towards a single set of high
quality accounting standards. At the same time the IASB
commented upon the three FSPs issued by the FASB
and played down any differences between the IASB
and FASB standards by suggesting such differences had
been ‘overstated’ (IASB 2009). Nevertheless, the IASB
did have to acknowledge that the IASB and FASB held

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B. Howieson
different positions on the impairment of financial assets.
For example, ‘the concept of other-than-temporary
impairments in US GAAP does not exist in IFRSs’ (IASB
2009: 2).
To help advise them on the financial reporting
implications of the GFC, the IASB and the FASB had
formed the Financial Crisis Advisory Group (FCAG)
consisting of 18 experts from around the globe. The
FCAG issued a report at the end of July 2009 in which
it set out four principles that it considered essential
to support the role of financial reporting in financial
markets (FCAG 2009: 1–2):
Effective financial reporting – financial reporting is
an important input for investors and requires high
quality standards that result in the delivery of unbiased,
transparent and relevant information. The requirements
of accounting standards should not be subsumed to
those of prudential regulatory standards.
Limitations of financial reporting – there needs to be
increased awareness that even high quality financial
standards have their limitations. For example, financial
statements report on a ‘point in time’ basis.
Convergence of accounting standards – there should be
one global set of accounting standards.
Standard setter independence and accountability –
standard setters must be distanced from undue influence
from private and political interests but must also remain
accountable for their decisions.
These principles summarised the FCAG’s analysis of the
debate associated with financial reporting and financial
markets. Notable among the report’s observations was its
conclusion regarding the role of fair values in the GFC.
Similar to the SEC study (SEC 2008), the FACG (2009:
4) stated, ‘it is unlikely that, on balance, accounting
standards led to an understatement of financial assets’.
As previously observed, the FCAG also argued that the
majority of bank assets in most countries had been
valued at historic costs and so were more likely to
have been overstated in financial statements during the
GFC. This practice was to the detriment of investors.
Perhaps more importantly, the report stressed at some
length unease about the political pressures placed
upon both Boards and the deleterious effects of such
pressures (FCAG 2009: 15): ‘during the last several
months, we have become increasingly concerned about
the excessive pressure placed on the two Boards to
make rapid, piecemeal, uncoordinated and prescribed
changes to standards outside of their normal due process
procedures. While it is appropriate for public authorities
to voice their concerns and give input to standard setters,
in doing so they should not seek to prescribe specific
standard-setting outcomes’.

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GFC or KFC?: How Standard Setters Were Battered and Fried
The FCAG’s concerns resonated with some in the
media (for example, Norris 2009c) and by September
2009 the urgency of the GFC had subsided enough to
allow the following summary of the impact of the crisis
on global accounting standard setting (Norris 2009d:
B1):
Both boards have tried to resist, but have been forced
by political pressure to back down on some specifics.
In the case of FASB, the retreat took a few weeks
after Mr. Herz was ordered to act at an extraordinary
Congressional hearing. The international board was
given a long weekend to retreat, with the European
Commission threatening to impose its own rules if the
board did not cave in. Both boards tried to reduce the
damage by forcing more disclosures, but it is unclear
how much good that will do. Neither was willing to defy
the politicians. It is unfortunate that there are significant
differences between the American and international
rules on how to determine fair values of financial assets.
That has enabled banks on both sides of the Atlantic
to demand that they get the best of both worlds. Pleas
for a level playing field have resonated in Washington
and Brussels . . . Efforts to fix those rules are under way.
Accounting for loans is likely to be improved. But in the
crucial area of fair value accounting, the American and
international boards are not moving in tandem. The
international board is delaying some issues as it rushes
to get a rule out this year that will clarify when banks can
ignore fair value. The American group is taking a more
unified, and slower, approach. By not moving together,
they run the risk of a race to the bottom, with investors
the losers.
Ingredients of the Political Pressure
The events described above show that the IASB and
FASB, despite their efforts, were unprepared for the
level of political fallout that accompanied the GFC.
More often than not the two Boards were forced to
develop regulatory responses that were not coordinated,
which resulted in a ‘tit-for-tat’ series of piecemeal
amendments to accounting standards. In turn, this
provided ideal opportunities for lobbyists on either
side of the Atlantic to leverage pressure on their
respective standard setters by pointing to the changes
made by its overseas counterpart. Proper consideration
and due process of these rule changes was sacrificed
as a result. The dangers of this process for standard
setting include biased standards that result from a non-
transparent decision-making process; potential technical
flaws because insufficient consideration is given to
the practical implications of the rules; rules that
are inconsistent with each other; a loss in public
confidence in the accountability of the standard setting
process; and a reluctance by countries to continue
the process towards global convergence of accounting
standards.
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GFC or KFC?: How Standard Setters Were Battered and Fried
Why did the independence and the quality of
accounting standard setting processes falter? It is perhaps
too simple to point just to the economic self-interest of
financial institutions for although this was an incentive
to lobby, a variety of other factors could be identified.
These include a mismatch between standard setters and
politicians as to the language and nature of the debate;
cultural and sovereignty issues; different definitions of
the ‘problem’ with a resulting competition for regulatory
space between regulatory agencies; and achieving a
balance between standard setters’ independence and
accountability.
Mismatch of debate
One reason that standard setters were immediately
at a disadvantage in the GFC debate was that
their focus is necessarily on the technical issues
associated with accounting for financial instruments.
However, politicians and the public do not understand
these matters.6 As Mosso (2010: 106) notes ‘Political
tampering with current GAAP is easy because nobody
understands the intricacies of GAAP except for a few
expert accountants and even they cannot prove that
one GAAP method is conclusively better than another
. . . GAAP is a geek language, decipherable only by an
initiated inner circle’. Politicians, on the other hand,
focus on the alleged non-technical impacts of accounting
standards, typically expressing these in emotive terms.
For example, in the Mark-to-Market Congressional
hearing there are frequent references to ‘small business’
and ‘job losses’ (Mark-to-Market 2008: 13, testimony of
Ron Klein): ‘as many of the members have said today, we
are worried about how small businesses and working
citizens in our communities cannot get loans. I am
worried about them and everyone else is about the people
who are losing their jobs because of this’.
These concerns are more likely than technical
accounting issues to resonate with the public and as
a result swing political power away from standard
setters. As Perry and Nöelke (2006: 578) note: ‘technical
solutions are never purely technical; they always have a
political purpose even if those propagating the solutions
are not fully aware of it . . . the social context in which
such expert knowledge has been acquired and practised
is critical in determining which technical solution of the
many possible ones is produced’.
Cultural and sovereignty issues
Although the alleged economic impacts were often
portrayed by the protagonists as a major reason for
the political pressure, there are cultural and sovereignty
issues that are also important and operate at several
different levels. At one level, there is a lack of shared
cultural identity between Europe and the US, which
8 Australian Accounting Review
B. Howieson
promotes a desire in both regions not to be dictated
to by the other. For example, Dewing and Russell
(2004: 293–94) have suggested that the EU’s adoption
of the IASB’s standards was more about avoiding
harmonisation with US GAAP than about whether IFRS
were technically superior. They further observe that
(Dewing and Russell 2004: 311) ‘the US, while being
an active participant in multilateral institutions, has
traditionally acted unilaterally’, a tradition which De
Lange and Howieson (2006) have described as consistent
with the concept of ‘American Exceptionalism’. These
‘differences’ are used to justify carve outs from IFRS as
necessary to satisfy local conditions.
The banking sector, particularly the European banks,
is often portrayed as the villain in the GFC drama. As
mentioned, economic self-interest may be one of the
factors driving banks’ opposition to fair value accounting
but Perry and Nöelke (2006) present a political economy-
based analysis that suggests some of the antagonism
may reflect different ways of regulating business. There
are two dimensions to their analysis. First, they argue
that, reflecting the growth of financial instruments
on firms’ balance sheets, accounting standards have
undergone a process of ‘financialisation’ in which the
focus has moved from standards related to production
activities to standards focused on financial activities.
This shift in standards has come about because the
private sector-based IASB is heavily influenced by ‘the
sheer dominance of a highly organized financial sector
which plays an increasingly prominent role in setting
the agenda for managing the European (and world)
economy’ (Perry and Nöelke 2006: 578). To support this
claim, they refer to their earlier empirical study (Perry
and Nöelke 2005) in which a network analysis of the
membership of the various committees and working
groups of the IASB and EFRAG showed that financial
sector actors are the best connected and most represented
in the standard setting network. Having established
the dominance of the financial sector in the standard
setting domain, the second element of their analysis is
to apply the concept of ‘varieties of capitalism’ of which
they describe two forms. The first are the Coordinated
Market Economies of which the Rhenish model (for
example, Germany) is an example within the EU. In
Coordinated Market Economies regulation is a public
task negotiated at the national level. The alternative
variety of capitalism is the Liberal Market Economies of
which Anglo-Saxon countries are seen as the examples.
In Liberal Market Economies there is a greater focus
on private sector-based regulators (for example, the
FASB) with regulation being more international in focus
and adversarial in nature. The difficulty that Perry and
Nöelke (2006) observe from their analysis is that the
IASB, as a private sector regulator, is an alien form
of regulation for the EU and its financial sector. The
adoption of the IASB’s standards thus represents ‘a

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B. Howieson
significant “shift in governance” . . . towards the private
and transnational level’ (Perry and Nöelke 2006: 576),
the cultural implications of which are still to be played
out. Their analysis suggests that there may be more to
the European banks’ objections to the IASB’s financial
instrument standards than blatant self-interest (Perry
and Nöelke 2006: 579):
business actors in the Rhenish model, are traditionally
accustomed to articulating and negotiating their
interests on a national level with their national
government and other interest groups. In the context
of transnational private regulation [i.e., the IASB] this
can be a severe disadvantage compared to financial
actors and coordination service firms . . . from the
Anglo-Saxon mould, which are well-adapted to interest
intermediation in the transnational sphere. Somewhat
ironically, the EU’s move to assert itself in the battle
for global accounting standards has led to a large scale
dismantling of dominant accounting regulations within
most of the member states, in favour of practices that
can be conceived as being part of a US hegemony.
To an outsider, it would seem that the IASB and its
trustees are yet to develop an effective mechanism to
manage the ‘cultural’ complexities of global standard
setting.
Problem definition and competition among
regulators
One interesting aspect to the debate was the definition
of the ‘problem’. Although for many critics the problem
was the requirements of accounting standards, there
was an element of the debate that focused upon the
capital adequacy requirements of prudential regulators.
Although these requirements typically start with
accounting numbers, the latter are modified as deemed
necessary for fiscal protection by prudential regulators.
Particularly in the US debate (see, for example, Mark-
to-Market 2008) the view was sometimes expressed
that rather than change the accounting standards and
disadvantage investors, why not modify prudential
regulations instead? These discussions involved some
jockeying between accounting and prudential regulators
with the latter arguably being more dominant. The
economists (through banks and some federal agencies)
appeared to have the ear of politicians (for example,
Perlmutter and Lucas’s (Perlmutter 2009a) proposed
oversight Board was stacked with representatives from
prudential rather than accounting agencies). This meant
that accounting standard setters were, in part, pressured
to change their standards to reflect an objective other
than that in their respective conceptual frameworks.
One of the recommendations of the FCAG (2009: 7–8)
was that it was necessary for accounting and prudential
regulators to work more closely together to anticipate
and manage conflicts in their requirements.

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GFC or KFC?: How Standard Setters Were Battered and Fried
Independence and accountability
The FCAG and some elements of the media saw the
political pressures exerted on the IASB and FASB as
a clear threat to the Boards’ independence and the
quality of accounting standards. Politicians, on the other
hand, demanded that the Boards be accountable and
responsive to changing economic conditions. Without
doubt, the lack of sufficient due process that was
exhibited on occasion throughout 2008 and 2009 does
demonstrate that the independence of the Boards was
compromised. The existing mechanisms designed to
defend that independence such as the oversight trustee
entities were powerless. Nonetheless, as regulators,
accountability is required, even on highly technical
matters. The FCAG (2009: 14) noted that accountability
for the Boards came from ensuring proper due process
and ‘strong oversight conducted in the public interest’.
These mechanisms were difficult to maintain given the
seriousness and urgency of the economic impact of
the GFC and the Boards were not well prepared for
such urgency. The FCAG recognised that there may be
occasions when an expedited decision-making process is
required but not in the piecemeal and uncoordinated
form of 2008 and 2009. Quite properly, the FCAG
(2009: 15) recommended that ‘the Boards define
in advance the circumstances under which it is
appropriate to act on the basis of expedited due
process’. Politicians and others should be informed
about the acceptable conditions of expedited due
process. As an attempt to improve the independence
of the IASB, the Trustees of the IASC Foundation7
(IASC Foundation 2009) established in early 2009
a Monitoring Board of public authorities to oversee
the activities of the trustees (who in turn oversee
the activities of the IASB). The Monitoring Board is
composed of the relevant leaders from the Emerging
Markets and Technical Committees of the International
Organization of Securities Commission (IOSCO), the
European Commission, the Japan Financial Services
Agency (FSA), and the SEC. The Basel Committee on
Banking Supervision also has a formal observer position
at the meetings of the Monitoring Board.
2010 and Beyond
The urgency of the GFC has abated somewhat in 2010
but the aftermath of the pressures of the previous two
years is yet to unwind. Although the IASB and FASB
have had some opportunity to regroup and develop
further guidance there are still concerns that they have
not reached a fully coordinated response on standards for
financial instruments. Even in June 2010 the Economist
(Anon. 2010: 84) reported that the two Boards ‘are
on very different tracks in their treatment of financial
Australian Accounting Review 9
GFC or KFC?: How Standard Setters Were Battered and Fried
instruments’. More scathingly it continued (Anon. 2010:
84–85):
Investors are still digesting the 214 pages of proposals
released by FASB on May 26th. . . . In both America
and Europe, instruments held for sale are marked to
market, whereas loans intended to be kept on the
books are held at cost. Although fair-value adjustments
for the latter are already disclosed in banks’ accounts,
FASB now wants them to be reflected in income. By
contrast, IASB, which unveiled its own proposals last
November, wants to spare loans held to maturity by
banks from the vagaries of the market. The two also
differ on how banks should reserve for deteriorating
credit, with FASB again putting forward the more radical
proposals. . . . It is hard to see how FASB and IASB
will reconcile their differences. FASB could soften its
stance during the four-month comment period, but it
can hardly have been unaware of outsiders’ arguments
when it drew up its proposals. It may be forced to bend
by politicians—who mostly dislike the brutal honesty
of fair value—just as it did last year when criticised
over its stance on toxic securities. European politicians
applied intense pressure to IASB when it was drawing
up its proposals. . . . Although supervisors can adjust
accounting standards to assess regulatory capital, such
divergence sits awkwardly with hopes for a global capital
standard. Some experts, including Mr Herz, support
decoupling accounting standards from bank regulation
so that bank assets are presented in two formats to meet
investors’ desire for transparency and regulators’ craving
for stability. Either way the current mess is a joke.
The FCAG (2009) was rightly concerned that continued
divergence between the two Boards could undermine the
goal of convergence to one set of high quality accounting
standards. Nevertheless, in November 2009 the IASB and
FASB reconfirmed their commitment to convergence.
The SEC also has reaffirmed in both February and June
2010 that it ‘continues to believe that a single set of high-
quality globally accepted accounting standards would
benefit US investors’ and that the SEC continues to
be of the view that it can reach a decision about the
applicability of IFRS to the US sometime in 2011 (SEC
2010b). Interestingly, the language of the SEC refers to
the ability to ‘incorporate’ IFRS into the US financial
reporting system rather than ‘converge’. This may reflect
a wish on the part of the SEC to keep its options wide
open. In the most recent version of its Work Plan for
the Consideration of Incorporating International Financial
Reporting Standards into the Financial Reporting System
of U.S. Issuers, the SEC (2010a) continues to signal issues
associated, inter alia, with the degree to which IFRS
are sufficiently developed and the independence of the
IASB. The SEC’s concerns for the independence of the
IASB reflect discussions in recent months as to how the
IASB is to be funded. One issue is ensuring that the
IASB has more stable sources of ongoing funding while
10 Australian Accounting Review
B. Howieson
another is whether funding will be tied to particular
interest groups. It has been reported, for example, that
the EU is seeking to fund the IASB for €15 million over
a three-year period (Lavi 2010). Given the recent history
in which the EU has sought to politically influence the
IASB, there is concern that these funding arrangements
may be just another political lever. As the IASB’s future
funding arrangements are as yet unclear, uncertainty
remains as to whether these will ultimately strengthen
or threaten the IASB’s independence.
Another threat to the independence of the IASB is its
Board membership going forward. By the end of 2011
all of the original Board members of the IASB will have
retired. This creates some incentives for key ‘pet’ topics
to be completed in a hurry (which potentially may result
in poor quality compromises) but more importantly
the retirements open the opportunity for appointments
to be made, not on the basis of expertise, but rather
as representatives of particular interest groups. It is
hoped that the Monitoring Board will exercise sufficient
oversight of the IFRS Trustees to ensure that future
appointments are made on a basis that is unbiased and
transparent.
The reader will have noted that much of the
debate described here occurred between two economic
blocs and two national standard setters. A large
portion of the global economy, namely the Asian-
Oceania region, was apparently disenfranchised from
this discussion yet, in many cases, still subject to the
outcomes of lobbying in Europe and the US. At the
International Financial Reporting Standards Regional
Policy Forum held in Singapore in May 2010, delegates
issued a Communiqué stating that ‘for the IFRS to
effectively reflect the economic substance and realities
of business transactions in the region, it is imperative
that stakeholders in the Asian-Oceania jurisdictions
play a more proactive role and become a larger voice
in the IASB’s quest to develop a robust set of high-
quality international accounting standards’ (IFRSRPF
2010: 2). The recently formed Asian-Oceania Standard
Setters Group (AOSSG),8 of which Australia and New
Zealand are members, offers the promise of a new
and alternative voice of sufficient economic power to
ensure more representation in future deliberations of
the IASB.
Conclusions
The story of accounting standard setting during the
GFC demonstrates the susceptibility of standard setters
to powerful political forces in a time of crisis. Despite
the existence of long established mechanisms to ensure
the independence of standard setters, such as adequate
due process and support from investor groups (among
others), the ability of the Boards to control their own

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B. Howieson
standards crumbled under the urgency of the economic
situation and the level of political force applied in
both Europe and the US. Although it may be tempting
to blame self-interested banks and politicians for
‘interference’ in the standard setting process, this would
simplistically ignore the need for accountability to be
balanced against independence and the complexity of the
motivations and environment in which global standard
setters operate. In times of crisis, action is demanded
by the public who, as a group, have little understanding
of or interest in the technicalities of accounting rules.
In addition, in a global context, responses to the crisis
will differ depending upon respective traditions and
institutional structures and it is not clear that the IASB
with its emphasis on resolving technical accounting
matters has developed explicit strategies for identifying
and managing these cultural contexts for its standards
and processes. The GFC also demonstrates that the
definition of the problem(s) is easily muddied in a crisis,
and in this case, confusion remains over whether the
problem was really an accounting one or a prudential
one.
It is unlikely that any regulator could have emerged
unburned from the GFC oven given the unusual
circumstances of the time. Although the resulting
changes to accounting standards led (and may continue
to lead) to sub-standard divergences between the IASB
and the FASB, the Boards’ need to act quickly was
unavoidable. If the aim of one global set of high
quality accounting standards is to be achieved, then
confidence will have to be re-established for the processes
(rather than the standard setters) by which international
accounting standards are promulgated. Monitoring
boards and similar additional levels of bureaucracy are
unlikely to make much difference unless their processes
are unbiased and transparent. The IASB also needs to
engage more meaningfully with the world beyond the
US and the EU and the AOSSG is a proactive way of
doing this. Ultimately, if we believe in its objectives,
then we all have a responsibility to promote and
defend the independence and accountability of the IASB
(Diplock 2009).
Bryan Howieson is an Associate Professor in the School of
Commerce at the University of Adelaide.
Notes
1 Those who, during the GFC, have been critical of accounting
practices have not always been clear about the object of their
concern. Essentially many criticisms have focused upon the
write-downs imposed on financial institutions’ operating profits
as a result of the fall in fair values. This concern was compounded
by the illiquidity in the markets at the time. However, it is
clear that many critics did not necessarily understand how the
accounting rules actually worked. For example, in testimony
during the US Congressional hearing on mark-to-market
accounting, many who criticised mark-to-market accounting

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GFC or KFC?: How Standard Setters Were Battered and Fried
through profit or loss appeared to believe that it applied to all
financial assets, despite regularly being told by the representatives
of the FASB and Securities and Exchange Commission (SEC) that
it did not! (Mark-to-Market 2009).
2 Pro-cyclicality refers to the claim that fair value mark-to-
market accounting tends to ‘amplify’ the impact of changes
in fair values on financial statements; it is argued that this is
particularly objectionable if the changes are only ‘temporary’.
For example, when fair values are falling, the practice of taking
these decrements through profit and loss causes investors and
other market participants to panic, thus driving fair values even
lower.
3 The SEC has chosen (so far) not to exercise this power. As noted
in its study on fair values (SEC 2008b), the suspension of FAS
157 would be a retrograde step because the requirements for
fair values occur in other standards and FAS 157 only provides
guidance on the application of fair values. A suspension would
mean less guidance was available to financial statement preparers.
4 By November 2009, the proposal had been modified so that the
proposed board could only make recommendations to the SEC
(Perlmutter 2009c).
5 Three hundred submissions were reportedly received (Mcfarland
and Perkins 2009).
6 The ignorance of politicians is often frightening. On occasion,
some of the primary critics of the FASB could not even get its
name right. For example, Perlmutter (2009b, emphasis added)
refers to it as the ‘Fair Accounting Standards Board’ while his
fellow critic Lucas (Mark-to-Market 2008: 10, emphasis added)
refers to it as the ‘Federal Accounting Standards Board’.
7 The IASC Foundation changed its name to the IFRS Foundation
on 1 July 2010.
8 See http://www.masb.org.my/index.php?option=com_content
&view=article&id=1396&Itemid=72 and http://www.ifrs.org/
Archive/INSIGHT+journal/Asian-Oceanian+Standards+
Setters+Group+created.htm
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